It is a sad fact of life that once you move out of your parents’ house; no one will be taking care of you except for yourself. It’s now up to you to get out of bed on time, feed and clothe yourself, and get the bills paid…all while keeping a “long view” on bigger items like the purchase of a home, college funds for children, and your own retirement.
Especially for younger workers, retirement seems like a distant and remote land that may only be a rumor. You can’t imagine what it would feel like to wake up each day and not have to go to work. After 20 years in the work force, however, you’ll begin to anticipate it!
Whether you choose to focus first on home ownership, retirement, or educational planning, having a solid savings plan in place will help you prepare for, and eventually to reach, those goals or to be prepared for any emergencies. How can you start?
Create a Reasonable Budget
No one likes creating a budget, or living with one. Budgeting is a necessary evil when working on improving your financial future. Start out by listing all income sources – this could be income from your primary job, but can also sometimes be supplemented. Do you get advertising income from a blog? Do you get dividends from any stock holdings? Do you have any interest income from financial accounts or rental income from real estate? As long as these flows are steady and reliable, include them. If not, leave them out of the budget and use them for additional savings when and as available.
Once the income is listed, create the list of obligations. Include everything – mortgage payment or rent, car payment, housing, a clothing allowance, food, utilities, and entertainment. Hopefully, you will end up with some amount left over. This is what we will use to build your nest egg.
Create a Responsibility to Yourself
This is a simple theory. When you have completed your budget planning, that leftover positive amount at the end is for savings. You should now change the plan a bit and set up a payment to yourself. This means we will go back to the budget planning stage, but the first obligation you will list is a payment to your plans. This comes off the top, every month, and should be considered every bit as critical as your mortgage payment or rent. This payment goes directly into your savings account, your RRSP, or investment account.
When you create this responsibility, you’re moving the funds out of “discretionary spending” and into “obligated spending”. You can count on it being there.
A great way to handle this is to automate it. Discuss it with your bank, and have the amount automatically drafted from your direct deposit account for your salary and moved into the savings account or other instrument that you’re using for your nest egg. With this approach, you’re not tempted to skip the self-payment, because it’s already done.
Improve Discretionary Income
Take a third trip through your budget. I know that you’re getting tired of looking at by this point, but consider the third trip an optimization. Where can you reduce other spending to increase the amount you can contribute to your nest egg? Can your mortgage be refinanced to achieve a lower payment? Can you make different choices about your entertainment budget? Small changes in your spending patterns can yield major benefits over your savings lifetime.
Take Advantage of Company Benefits
With today’s competitive jobs environment, many companies are working hard to hold on to known talent. If you’re fortunate enough to have a career that carries a group RRSP benefit, you should always take full advantage.
Always keep in mind the tax advantages of each kind of investment instrument. RRSP funds grow in a tax-advantaged state because they are pre-tax contributions. Speak with a financial services professional to be sure that all your investments support a tax-optimized strategy, and to decide how to apportion your savings between your RRSP and other savings methods.
Of course, if your company doesn’t sponsor a group RRSP, it is definitely worthwhile to set up your own. Discuss options with your bank, as nearly any financial institution can assist in setting up an account.
Don’t put all of your savings in the same place. While you want to take full advantage of your company’s RRSP savings plan, you don’t want to sink every penny of discretionary income into the same spot. You should plan on a distribution of your money – your RRSP contribution goes into the company fund, but you may also place money into a savings account, a certificate of deposit with your bank, or a mutual fund. Be aware of the risk / reward profile of each type of investment, so that you remain comfortable about the security of your money. As risk increases, returns increase, and vice-versa.
Remember that every dollar you save is a dollar for your nest egg. When shopping for life insurance, first consider any options available from your employer. If this doesn’t fit the bill or is not available, then shop around for the best deals. Buy term insurance, not whole-life, and invest the difference between the premium amounts.
Maintain a Long-term Strategy
Building your life savings is not an overnight process. You have to be mentally prepared to maintain your process over many years.
One distraction may be market volatility, for those who have invested their savings in the stock market. Don’t overreact to short-term changes in the valuation of your savings. Keep a long-term focus, and only make changes in your investment strategy after careful consideration.
Improving your financial future is never simple or easy, but following these recommendations will create a roadmap that leads to a more secure financial future. Remember that as you age and grow towards retirement, shifting assets into lower risk investments is always sound advice. Here’s to your success!
The image used in this post is taken from FreeDigitalPhotos.net